After the markets rallied in September, unresolved issues are starting to affect the economy.
Red screens light up the City as global markets fall
Trader’s dealing screens across the city have been looking very red lately with the FTSE100 down in excess of 3% yesterday and drifting lower this morning as I write. It’s not just the UK market though; Europe is lower, as was Asia overnight, which in turn follows a strong selloff in the US over the last few days. This follows economic data releases which are leading to a reassessment of global economic growth.
September was a very good month for equity markets with the FTSE100 and the S&P 500 both up by roughly 5% since the lows seen in the summer. A number of factors have driven this, including a calming down of the trade spat between the US and China while economists took the view that the global economic slowdown may not be as aggressive as feared earlier on. Central banks have also rescued markets with interest rate cuts by the Federal Reserve and the European Central Bank with the rhetoric of further monetary support.
Despite the September rally, the issues for the global economy have not gone away. The trade war with China is not resolved and will more than likely continue as long as Trump is in office. Tensions between Saudi Arabia and Iran are at the most elevated levels for many years. Let alone the fact that Brexit looks unlikely to be resolved by the end of this month. However, the US economy does still stand out from its peers, the Non-Farm jobs numbers are still strong with unemployment at record lows, inflation is under control and the GDP growth rate for the second quarter was respectable. But, Tuesday’s of the US ISM Manufacturing index for September showed a second month of contraction, and materially worse than expected. My instant reaction to this was ‘has the global economic slowdown caught on in America?’ The market’s spooked reaction seems to suggest a similar view.
Trump may have been right to call for drastic interest rate cuts, but the FED has a responsibility to take a measured and data dependent approach. The man that he is means he will never take blame and change the narrative around the cause and effect. Trump’s trade war with China is the lead cause for weakening manufacturing data. Car manufacturers are struggling with tariffs on imported steel, an unintended consequence of his America First policy; US farmers are struggling to find buyers for their produce as China looks elsewhere. At the same time, US semi-conductor manufacturers struggle to fill the demand vacated by Huawei who have made strides to replace US intellectual property in 5G technologies. The latest WTO ruling in the Boeing v Airbus case means the Trump could expand his trade wars further.
What do investors do from here?
Most probably nothing! Markets go through these periods all the time. We had the pull-back late last year, and other more moderate pull-backs in May and August this year, all of which the market made a recovery from, this should just be another mini correction. If you have structured your portfolio well, sitting tight and doing nothing should leave you comfortable because it should ride out these short term moves.
For those who have cash on the side-lines, it may be time to put that to work now for better valuations and an alternative to paltry interest income. Our in-house research team have preferred UK, European and Japanese equities prior to this risk-off period and now see even better value in these regions over the US.
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